Income Tax Act 2025, effective April 1, 2026, renumbered salary TDS from Section 192 to Section 392. The calculation method, slab rates, Form 16 format, and compliance requirements are unchanged — only the section number changed. For transactions before April 1, 2026 — Section 192 applies. For FY 2026-27 onwards — Section 392. Accounting software will use both labels in transition — verify which year’s transactions you are referencing.

1. Estimate Annual Gross Salary: Basic + HRA + Special Allowance + Transport Allowance + Medical Allowance + Bonus (estimated) + Perquisites (company car, accommodation, ESOP, etc.) — all components on annual basis.
2. Deduct Exemptions: HRA exemption (minimum of three conditions — see formula), LTA (if claimed), and other applicable allowance exemptions based on employee’s declarations in Form 12BB.
3. Apply Standard Deduction: ₹75,000 in both Old and New Regime (Budget 2024 — FY 2024-25 onwards).
4. Deduct Chapter VI-A Investments (Old Regime only): 80C (up to ₹1.5L), 80D (health insurance), 80CCD(1B) NPS (₹50,000 additional), home loan interest Section 24(b), and any other declared deductions. New Regime: these deductions are not available.
5. Calculate Tax on Taxable Income: Apply applicable slab rates (based on regime chosen). Add 4% health and education cess on the tax amount.
6. Apply Section 87A Rebate (if applicable): New Regime — taxable income up to ₹12 lakh: rebate of up to ₹60,000 (effectively zero tax). Old Regime — taxable income up to ₹5 lakh: rebate of up to ₹12,500.
7. Divide by 12: Monthly TDS = Annual tax liability ÷ 12. This amount is deducted from each month’s salary. Adjusted upward or downward as the year progresses when investment proofs are submitted.

When Old Regime Is Better

Old Regime typically wins when: HRA exemption is significant (metro city, high rent), home loan interest deduction is substantial (above ₹1.5–2L), and total 80C + 80D + NPS deductions are maximised. The break-even point shifts with each Budget — calculate both for your specific numbers every April, not from a generic rule.

When an employee receives a bonus, arrears, or performance-linked variable pay — a different TDS calculation applies. Without the average rate method, the employer would deduct tax on the entire bonus in the month it is paid — causing a dramatically lower take-home in that month.

How Average Rate Works

1. Calculate total annual tax liability including the bonus (or variable pay) — as if it is part of regular salary
2. Divide the total annual tax by 12 — this is the average monthly TDS rate
3. In the bonus month — deduct the average rate amount (slightly higher due to bonus) rather than the full tax on bonus
4. Result: tax burden is smoothed across the year, not concentrated in one month

Part A — TDS Certificate (TRACES-generated)

Part A is generated by the employer from the TRACES portal — not self-prepared. It contains: employer’s TAN and name, employee’s PAN and name, the assessment year, quarterly TDS deducted and deposited amounts, and BSR code/challan details. This part is TRACES-certified and authoritative. The figures here must match the employee’s Form 26AS.

If Form 16 Part A figures do not match Form 26AS — it means the employer either did not deposit TDS or deposited it against a different PAN. This must be resolved with the employer before filing ITR — claiming TDS credit that is not in 26AS creates a processing demand.

Part B — Salary and Deduction Breakup (Employer-Prepared)

Part B is prepared by the employer. It contains: gross salary component breakup (basic, HRA, allowances), HRA exemption calculation, perquisite valuation, all Chapter VI-A deductions declared and accepted (80C, 80D, NPS), net taxable income computation, and the tax calculation. Part B is what you use to fill Schedule S and the deductions schedule in your ITR.

Employer’s Deadline: June 15

Employers are legally required to issue Form 16 to all employees by June 15 each year (for the preceding FY). Penalty for delay: ₹100/day under Section 272A(2)(g). If Form 16 has not arrived by June 15 — formally request it in writing. You can also file ITR using AIS, salary slips, and Form 26AS without Form 16 — but having Form 16 simplifies the process significantly.

Perquisites are non-cash benefits provided by the employer. They are taxable in your hands and added to your gross salary before TDS calculation. Common perquisites and their tax treatment:

Changing jobs mid-year creates a specific TDS problem: each employer calculates TDS independently on their own salary payments. If annual income is ₹14 lakh total (₹6L from Company A, ₹8L from Company B) — each employer calculates TDS assuming the other salary does not exist. Combined income may push into a higher slab, but neither employer accounts for it.

Form 12B — The Solution

When joining a new employer — submit Form 12B (not Form 12BB) to the new employer. Form 12B declares the salary received from the previous employer in the same financial year. The new employer then factors in the previous salary while calculating TDS for the remaining months — ensuring the combined income is correctly taxed.

Example 1 — Old Regime with Deductions (Correct SD ₹75,000)

Software engineer, annual CTC ₹9.5 lakh. Declares: HRA exemption ₹1,20,000, 80C ₹1,50,000, 80D ₹25,000.

Without declaring deductions (same Old Regime): taxable ₹8,75,000 → tax approximately ₹95,000 → monthly TDS ₹7,917. Difference from timely declaration: ₹5,447/month more in take-home.

Example 2 — New Regime, ₹12.75L Gross (Zero Tax)

Marketing manager, gross salary ₹12,75,000. New Regime selected. No deductions available.

A ₹12,75,000 gross salary employee in New Regime pays zero income tax — and zero monthly TDS. If the same employee earned ₹12,76,000 — the marginal ₹1,000 above ₹12,75,000 would attract tax because the 87A rebate applies only when taxable income is at or below ₹12L after Standard Deduction.

Mistake 1 — Declaring investments late or not at all: HR asks for declarations in April — most employees submit in January (or never). Late submission means employer has been deducting excess TDS all year assuming no deductions. The last three months see aggressive higher TDS to catch up. Result: January–March salary is significantly lower than it should have been all year. Submit Form 12BB in April with estimated investments — revise by November with actual proof amounts.

Mistake 2 — HRA exemption calculated incorrectly: HRA exemption = minimum of three conditions: (a) actual HRA received, (b) 50% of basic for metro / 40% for non-metro, (c) actual rent paid minus 10% of basic. Metro = only Delhi, Mumbai, Kolkata, Chennai. Bengaluru, Hyderabad, Pune — non-metro (40%). Using 50% for Bengaluru inflates the declared exemption and creates a mismatch when the actual ITR is filed.

Mistake 3 — Not comparing Form 16 Part A with AIS/Form 26AS: Employer deducted TDS but made an error in their Form 24Q — wrong employee PAN, wrong challan mapping. Form 16 shows the TDS deducted. Form 26AS shows what is actually credited against your PAN. If they don’t match — you cannot claim the unmatched TDS in ITR without it being rejected in processing. Check AIS before filing. Discrepancies must be resolved with employer — not assumed away.

Mistake 4 — Job change without submitting Form 12B: As explained in the example above — combined salary falls in higher slab, each employer deducts TDS independently on lower individual salary. Shortfall discovered at ITR filing — with 234B interest from April 1. Form 12B submitted to new employer on Day 1 of joining eliminates this completely.

Mistake 5 — Choosing regime without calculating both: Employer defaults to New Regime from FY 2024-25 if no declaration is received. Many employees accept the default assuming it is correct. For someone with significant HRA, home loan interest, and 80C investments — Old Regime may save ₹50,000+ more. Calculate both regimes in April using your actual expected investments and salary — not a generic rule. Declare the chosen regime to employer in April via Form 12BB.